REAL ESTATE GUEST BLOG -- NICK R. CATANZARITE

Finding balance: Retail leasing from the tenant perspective

Blog Entry: May 13, 2013 4:30 AM | Author: By Nick R. Catanzarite

Nick R. CatanzariteNick Catanzarite is a partner in the Real Estate Practice Group of Cleveland-based Walter | Haverfield LLP.

Retail tenants, particularly smaller or inexperienced businesses, often complain they are at the mercy of landlords in negotiating the terms and structure of leases. While sometimes even the largest of tenants may lack leverage in settling on lease terms, developing an awareness of the key issues and memorializing the material terms early on can help level the playing field with your landlord.

To begin with, tenants should consider putting the key terms and provisions of the deal into a letter of intent (LOI) when negotiating a new lease. The LOI will confirm the most critical terms and set the framework for negotiating the remainder of lease. In addition, taking the time to work through the primary issues upfront and agreeing to an LOI can help to broaden the areas in which tenants may be able to further negotiate terms, which may otherwise not have been subject to discussion.

Responsibilities for upkeep are set early in the leasing process

The obligations of the landlord and tenant under a retail lease arrangement can vary depending on the circumstances. The most common form of retail lease is a “triple net” or “NNN.” Under a triple net lease, the tenant is responsible for maintenance and repair of the leased premises, as well as a proportionate share of the center's real estate taxes, the landlord's insurance premiums and the common area expenses. Under an NNN arrangement, tenants should press hard to ensure that the landlord remains responsible for capital repairs, i.e. structural elements of the building, and things caused by the negligence or willful misconduct of the landlord or its agents or representatives.

If the lease arrangement is not an NNN and the tenant has negotiated for the landlord to assume responsibility for specific maintenance obligations--typically the roof and HVAC--the tenant must be certain the lease clearly reflects such obligations. Furthermore, as a precautionary measure, regardless of who is responsible for repairs, the tenant should take necessary steps to inspect the roof and HVAC prior to taking occupancy of the space. Additionally, the tenant should look to include self-help language in the lease in the event the landlord fails to perform its maintenance obligations.

For example, if the lease states that the landlord shall be responsible for the maintenance and repair of the roof and the roof is continually leaking without any response from the landlord, the tenant would obviously want the ability to fix the roof and offset such costs and expenses from future rent obligations. This would seem to be a logical solution to the leaking issue but, oftentimes, the lease will not contain an explicit self-help right for the tenant without the tenant requesting such language.

Tenants need to protect the ability to help themselves if the need occurs

The same premise would apply for HVAC repairs and maintenance, but sometimes the tenant might be responsible for repairs and maintenance of the HVAC units servicing its leased premises, with the landlord responsible for replacement of any defective units. In such situations, tenants should be aware of the possibility that the landlord will keep repairing dying units and delaying the replacements. This can be very frustrating for the tenant because the units will keep failing, resulting in continuous calls to the landlord or HVAC repairman. Again, self-help provisions could be beneficial in these situations; however, tenants could also request language in the lease to address when an HVAC unit should be replaced. For example, if an inspection performed by an independent party determines that the unit must be replaced, then it could trigger an obligation for the landlord to replace the unit.

The above examples are just a few of the issues that tenants should pay attention to when negotiating their retail lease agreements with the landlords. Most lease arrangements last longer than the average marriage in the U.S., so it is wise to spend the necessary time upfront negotiating the terms and provisions necessary to protect your interests.

Nick Catanzarite is a partner in the Real Estate Practice Group of Cleveland-based Walter | Haverfield LLP.

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